Large Firm Dynamics and the Business Cycle
68 Pages Posted: 12 May 2015
Date Written: May 2015
Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models the firm size distribution and show that the resulting closed form solutions for aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and (iii) time-varying second moments. We explore the key role of moments of the firm size distribution and, in particular, the role of large firm dynamics in shaping aggregate fluctuations, theoretically, quantitatively and in the data.
Keywords: aggregate fluctuations, firm size distribution, large firm dynamics, random growth
JEL Classification: E32, L11
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